The IBS Times; 182nd Issue; August 2015

INDEPENDENCE DAY SPECIAL

August 2015, Issue No. 182

DIMINISHING GLITTER BY SUPRIYA GAUR

WILL THE SUN RISE?

BY ANUPAMA KUMARSWAMI

SETTING UP FOR THE NEXT INNINGS BY ROHIT TILLU 1|AUGUST2015

FinStreet, IBS Hyderabad

ISSUE NO. 182, August 2015

What’s Inside

2|AUGUST2015

INTELLIGENCE BEYOND SUCCESS

LETTER FROM THE EDITOR TEAM IBS TIMES KAUSHIK CHANDELL (EDITOR-IN-CHIEF) AVIK CHAKRABARTY (MANAGING EDITOR) ALISHA SINGH APOORVA ANUSHA

KOLISETTY AISHWARYA MANJARI SHARMA NAVJOTH SAHU PRIYANKA MALIK RAHUL MISHRA RIPU TANDON SACHI KHESKANI SAMEENA USMAN SRISHTI KARMAKAR ABHINAV BANERJEE ANUPAMA KUMARSWAMI

Dear Readers, YES, WE ARE DIVERSIFIED BUT WE ARE NOT DIVIDED. Team FinStreet wishes everyone a very proud 69th Independence Day. To begin with, I would like to especially thank four students of IBS Hyderabad without whom this issue wouldn’t have been possible, Aanjaney Pratap Sachan, Ankur Kumar, Hitesh Gupta and Vibhor Wahi.

So without wasting any more time, we proudly bring to you the 182nd issue of The IBS Times.

Our team, in this edition brings to you the recent ongoing on Nexa, an initiative by Maruti Suzuki.

Further, we have shed some light on Godrej’s new strategy i.e. Going Online along with an article on Reliance JIO 4G Spectrum. From the global market, Times brings to you Impact of Iran’s Nuclear Deal on India. For your better understanding about the market scenario we have for you, our famous Market Watch titled Market Saddle goes Straddle. Furthermore, we have analyzed and published Quarterly Reports as well as from the Industrial point of view we have shared our insights on Hospitality Sector. This issue from the investment point of view also brings to you an exhaustive report on ABAN OFFSHORE LIMITED published by Team Vriddhi Research.

Hope you have an enriching experience reading The IBS Times. Your feedbacks and opinions will help us make it better.

Kaushik Chandell Team FinStreet

CHESTHA KUMAR EYAMINI N HEMLATA HAJONG ISHAN GUPTA JATIN SHARMA JHARNA SONI PRATEEK PANDEY RANU SARUPRIA RAVI RANJAN PANDIT ROHIT TILLU SAKSHI ISSAR SANDHYA ADHAVAN SUPRIYA GAUR SWARUPA ROY 3|AUGUST2015

-HU SHIH FORMER AMBASSADOR OF CHINA TO USA

BUZZ AROUND

NEXA: A NEW DESTINATION, A NEW EXPERIENCE

-Eyamini N

Maruti Suzuki on 30th July 2015 launched new retail

emergency support, accessory purchase, event

outlets under NEXA brand to sell the premium products

updates, booking and mange service requests and

starting with S-Cross. Nearly 100 showrooms will be

even their favorite music. It has various unique

put up across the country in the coming 6 months. At

features on the webpage for a buyer’s guide like E-

present they have set up 30 showrooms and they have

brochure, book a test drive, request a quote, NEXA

made a verbal agreement with the existing 1650

finance, Maruti Insurance, show room locator, on

dealer’s to lead the customer’s to their nearest NEXA

road service and an option to sell your old car here.

showroom. They are to hire 2500 managers in the FY

With this it wants to give an overall five star

2015-2016. They have hired 1000 relationship

experience and build long term relationship with the

managers from different sectors like hospitality,

customers. All together a new experience on

aviation and financial services. According to the recent

Maruti’s SUV segment. The compact SUV segment

survey the company has lined up a capital expenditure

has become a very popular choice among the

of 4000crore for the current fiscal year. The company

customers today. King of compact segment Maruti

stated that it would be utilized for new model launches,

did not have an offering here, however they are all

R&D, in marketing infrastructure and routine activities.

set to make the entry with their s-cross .They are

To achieve the outset target Maruti Suzuki is picking

calling this s-cross a premium cross over targeting

upon high end streets to set up showrooms, like in

the luxury car segment.

Phoenix Mills in Mumbai, Brigade Road of Bengaluru

Maruti Suzuki is India’s largest car manufacturer.

and Hyderabad’s Jublie Hills. The NEXA showrooms are designed in black and white monochromatic theme



fiscal year, a growth of 13.8% compared to the

to enhance the vehicles displayed in their full glory. The

same period last year.

showroom also has a dedicated in-showroom delivery area with LEDs and music. A Loyalty program has also

It sold 3,41,329 units in the first quarter of the



The stock rose 3.02 % in the mid of July still up

been designed to offer rewards and recognition beyond

by 0.81% to an all-time high of 4293.55 during

the automobile industry for customers .They want to

the beginning and stabilized at 4,304 on closing

enhance the customers’ retail experience by welcoming

as on 31st July 2015 on the BSE.

customers via APPLE TVs.



They have achieved a market share of 45 percent at present according to the recent data.

The relationship managers will be equipped with I-pads to explain car features through interactive graphics .The brand will also have an owner’s app, a smartphone app, which will enable customers to recall service history, emergency support, accessory purchase, event updates, 4|AUGUST2015

booking and mange service requests and even their



The company’s trailing 12 months EPS (Profit allocated to each outstanding share of common stock) was at Rs.137 per share per quarter ended June 2015. The stock’s price to earnings Ratio (Company’s current share price compared to its per share earnings) was at 31.58.

in June 2015. The stock’s price to earnings

company says that the 1.6 litre engine variant will

Ratio (Company’s current share price compared

be priced quite competitively.

to its per share earnings) was at 31.58. 

The latest book value of the company is Rs.87.31 per share.

Their medium term goal is to achieve two million sales by the year 2020, for which the company is targeting new segments of customers with changing trend in India towards SUV’s. Their revenue trend shows an upward curve throughout especially in the month of July. They are planning to invest this surplus in the upcoming NEXA showroom which is a new segment start up for Maruti, by which there is a good chance of increased dividend per share. This gives a lead to increase in demand and automatically the share price will boost up. It is been expected to see a major increase in the share price of Maruti Suzuki’s automobile sector after the launch of NEXA showroom.

S-cross India’s first premium crossover will be the first

Specifications: Price: 8 to 10 lakh INR. Length: 4300mm/width:1765mm/height:1590mm Minimum ground clearance: 180mm Wheelbase: 2600mm Power: 118bhp/torque:32.6kgm Interiors: Touch Smart play infotainment system, Reverse parking display, Rear center armrest with cup holders ,VOICE command, AC control, Satellite navigation, Air bags, Auto climate control, Automatic head lamps, Automatic wipers, projector head lamps.

Boot Volume: 353 liters.

Seating capacity: 5 Engine: DDiS 320, DDiS 200 All together it has an artistic and aerodynamic side, a polished and powerful front. Everything has a

car to be sold under NEXA. The S-Cross is based on the

quality feel about it. It’s a great high way cruiser

European SX4-Cross crossover model, though the

and a boost to Maruti Suzuki’s market share in the

company has made some design and mechanical changes to make it compactable to Indian Roads. It is a dealer centric model. Dealers are given all guidance and training in terms of man power and in terms of what kind of elements they should be putting there.

The s-cross will be made available with two engine option-1.3 and 1.6 liter multi jet diesel. Where the former is same that powers the Ciaz, Swift, Swift Desire and Ertiga, the more powerful 1.6 multijet diesel engine will make its debut in India with the S-cross. Though the 1.6 litre diesel power train will be imported, the company says that the 1.6 litre engine variants will be 5|AUGUST2015

priced quite competitively.

premium segment enhancing its economies of scope.

GODREJ’S MULTICHANNEL MARKETING

GOING ONLINE!

-Hemlata Hajong

Indians have become tech savvy, time conscious and

the online players, we are working on a strategy of

want more out of anything and anywhere they invest.

differentiated offering with our strategic online

This can be seen in the growing popularity of e-

partners so that together we offer a value to the end

commerce in India. It is an emerging channel. Many

consumer which is not based on the discounted price

startup online companies have had huge turnovers

but on the overall product proposition”.

within a short span of time. This has led major and

“Online sales today are growing by leaps and bounds.

established brands to showcase their power online as online shopping has come at par with physical shopping. On 26th of July 2015, Indian conglomerate Godrej announced that it is working on differentiated

E-tailing has successfully created a buzz and connect

with the consumers. Going by the performance in the past year, we feel that this emerging channel has huge potential,” he said.

online strategy for its products in the wake of deep discounting by e-retailers.

The Godrej Group earlier known as “Godrej Soaps” is headquartered in Mumbai, Maharashtra and is owned by the Godrej family. Ardeshir Godrej and Pirojsha Godrej founded this company in 1897. It entered into the market with security equipment (with lever technology). This has expanded to chemicals, consumer products, industrial engineering, appliances, furniture, real estate and agricultural products. The current worth of the company is $1.875 billion. On the occasion to celebrate 119 years of the company’s existence Godrej Group’s present chairman said that it would concentrate on consumer products to lead its growth in the future.

They have 25,000 outlets across India with over 6000 outlets in the east alone. In two years Godrej is planning to open 100 more outlets that will bring in 3-4% to its turnover.

All major online players are using the strategy of deep discounting. They offer huge discounts on the market price in order to attract traffic. Besides this they offer seasonal and festive offers which is the weakness of Indian consumers. But since all websites offer such discounts they don’t have loyal customers. Consumers compare and then prefer a website. Once the Government starts interfering they’ll all lose the customers who cause traffic only because of discounts. Hence new strategies besides deep discounting will be beneficial from the two ends. Like few companies launch their new products only through their online partners. Godrej claims that the strategy of differentiated online offering will be different. It will not only aim at customer satisfaction but also overall product proposition. Features that suit the needs of the consumers will be kept in mind and

will

be

highlighted.

What

exactly

is

Godrej Appliances business head & EVP Kamal Nandi

differentiated marketing strategy and product

told a leading daily, “When it comes to discounting by

proposition that will be used by “Godrej”?

the online players, we are working on a strategy of 6|AUG U S T 2 0with 1 5 our strategic online partners differentiated offering

so that together we offer a value to the end consumer

A differentiated marketing strategy is creation of campaigns that aims at least two market segments or

ensuring delivery at their doorsteps. Godrej Tyson foods have also tied up with food based e- commerce

Z

companies. They deal in ready to cook and fresh chilled chicken segment. It is growing at 16-18 percent annually in terms of business volumes.

Since the past three years Godrej Consumer Products Ltd (GCPL) has been growing about 28% to 29% What exactly is differentiated marketing strategy and

annually which is a satisfactory pace according to

product proposition that will be used by “Godrej”?

“Vision 2020”. 70% of the sales of GCPL come from

A differentiated marketing strategy is creation of

urban areas. Hence they have to work on rural areas.

campaigns that aims at least two market segments or

But any day urban segment would do better than

groups. It is not concentrated to one specific group.

rural segment because of the demand of premium

Like it can promote a product or a service suitable for

products. They have come up with innovative

different age groups or different income groups. It can

designs and graphics to suit modern homes. Godrej

target one group with low cost feature and the other

appliances alone contribute 33% of the company’s

with product quality.

total turnover out of which refrigerators take the first place in terms of sales. Then comes air conditioner,

Whereas

product

proposition

is

informing the

customers the benefits of the product and what makes them stand out from the rest. It gives full understanding of the product to the targeted consumers. The three major steps of product proposition are as follows: 

Gain insight



Optimize



Communicate

Godrej Group’s “Vision 2020” to grow 10 times in 10 years started in the year 2010. It is betting high on ecommerce to move forward. Currently 3% of the business comes from e- commerce. They have already tied up with Flipkart, eBay, Amazon and also have their own sites. Some e- commerce companies are also helping them gain popularity amongst customers by ensuring delivery at their doorsteps. Godrej 7|AUGUST2015

followed by washing machines. For April-June quarter of this fiscal year GCPL reported 39% growth in net profit.

bound to increase its revenue. But it needs to act on this as soon as possible because other major electronics

Godrej first collaborated with Times Internet’s online shopping portal shopping.indiatimes.com in the year 2012 to launch an online brand shop. Consumers were able

to

buy

Godrej

appliances

online

at

godrej.indiatimes.com (currently out of service). But now Godrej Appliances has its own shopping website as electronics top the most searched after items. It helps a consumer to choose easily between productsrefrigerators, air-conditioners, washing machines and microwave ovens. From options like color to details of the features of the product everything is available online. The original price and the discounted price can also be seen. There is no cash on delivery option but they do have options for product demo and servicing.

Godrej wants over 3600 crore revenue in the fiscal year 2016 and this online e retailing strategy would make a huge impact on the sales, as Godrej is a trusted brand.

It has always worked towards the betterment of the Indian society. It invests in education, healthcare and upliftment of the underprivileged. This new strategy is bound to increase its revenue. But it needs to act on this as soon as possible because other major electronics | Anot U Grunning U S T 2 0behind.

15 brands 8are

brands

are

not

running

behind.

MARKET WATCH

MARKET SADDLE GOES STRADDLE

-Ravi Ranjan Pandit & Prateek Pandey

The performance of global markets last week was

Performance of the major indices during the

volatile with US and Europe stocks slide while Asian

week (Aug 1-7)

shares

were

mixed.

Global

data

were

little

disappointing, though a report from US suggested that US gained over two lakh jobs in July which could make

World Indices (Aug 7,2015) Americas

Close

% change

Nasdaq composite

5056.44

1.62

S&P/TSX composite

14405.91 0.67

Dow Jones

17419.75 -0.69

end of the current week on the back of lackluster

S&P 500

2077.57

-0.29

German Industrial output reports. Further even US jobs

Europe /Africa

data and disappointing earnings report had negative

CAC 40

5178.1

0.27

impact on the markets. Among the major Asian stock

DAX

11547.11 0.33

markets, stock market in China posted gains (up 2.2%)

IBEX 35

11227.9

0.23

over the week as the Government intervened to arrest

FTSE 100

6744.75

0.03

the slide in stock prices. The stock market in Japan

Asia/Pacific

gained 0.7% over the week. The gains were mainly on

Nikkei 225

20724.56 0.29

account of Bank of Japan keeping its stimulus program

Hang Seng

24552.47 0.73

unchanged.

Shanghai composite

3744.21

BSE Sensex

28236.39 -0.22

Nifty

8564.6

US Federal reserve to raise interest rate in September.

World market Overview European stock markets witnessed losses towards the

World market during the week (Aug 1-7)

2.26

-0.28

Among the various world indices, In the Americas, NASDAQ composite and Dow Jones were down by (1.62%) and

(-0.69%). In the Europe, CAC 40 and

DAX also closed in red (-0.27%) and (-0.33%) after pairing some gain. The performance of the indices in Asia-Pacific ended on a positive note with Shanghai composite ending (2.2%) higher. With Bank of Japan keeping its stimulus performance unchanged, Nikkei 225 closed (0.29%) higher.

9|AUGUST2015

The Indian Stock market posted marginal gains (up 0.4%) over the week. After a healthy rally in past couple of days, the markets ended the week on a lackluster note amid weak global cues and stalemate in Parliament. Both the market indices closed in red with nifty closing at (-0.28%) and Sensex closed at (-0.22%) down.

CNX Nifty

S&P BSE Sensex

International

Domestic

Metals ($/tonne)

Price

% change

Price

% change

Aluminum

1569.5

-18.1

2179.7

-12.3

Copper

5171.5

-19.2

6695.9

-10.6

Lead

1710.5

-19.1

1975.9

-9

Tin

15300

-4.5

18347

-6.7

Zinc

1888

-21.5

2556.1

-16.7

Gold ($/ounce)

1085

-9

1212

-8.7

Silver($/ounce)

14.6

-11.8

16.5

-10.8

Crude oil($/bbl)

48.7

-26.5

50

-24.8

Natural Gas($/mmBtu)

2.8

-0.7

2.8

-1.4

Wheat

185.5

11

233.8

0

Sugar

344.3

-7.8

373.5

-11.1

Rubber

1500.8

16.5

1864.5

-6.7

Cotton

1427.5

-2

1479.6

-4

Energy

Agri ($/tonne)

Table: Commodity Market

10 | A U G U S T 2 0 1 5

07/08/2015

06/08/2015

05/08/2015

04/08/2015

03/08/2015

02/08/2015

01/08/2015

31/07/2015

30/07/2015

29/07/2015

28/07/2015

07/08/2015

06/08/2015

05/08/2015

04/08/2015

03/08/2015

02/08/2015

01/08/2015

31/07/2015

30/07/2015

29/07/2015

28/07/2015

27/07/2015

Commodities

27/07/2015

8650 8600 8550 8500 8450 8400 8350 8300 8250 8200

28400 28200 28000 27800 27600 27400 27200 27000

Top 5 Gainers

Close

% change

Jai Prakash Powers

8

28.1

Jai Prakash Associates

12

23.5

Cummins India

1184

18.8

Torrent Power Ltd

172

17.9

Union Bank

206

16.6

were among the underperformers with GAIL (341.70)

Top 5 Losers

Close

% change

and Oil India (456.10) underperforming in Oil and Gas

JSW Energy

77

-8.7

and GlaxoSmithKline consumer healthcare (6296.15)

HCL Tech

939

-5.8

and Heritage Foods (430.50) in FMCG. Midcap and

Coal India Ltd

416

-5.4

Small cap stocks were in great demand during the week

Muthoot Finance

187

-5.3

as participation from domestic high net worth investors

Coromandel Intl

231

-5

Sectoral Performance The major sectors like Realty and Auto rose by (3.6%) and (3.4%). DLF (125.70) and Oberoi Realty (257.30) were the performers in realty and

Ashok Leyland

(87.20) and Hero MotoCorp (2660.50) in the Auto sector. Oil & Gas and FMCG at (0.7%) and (0.1% )

and Retail investors has increased. The Employee Provident Fund Organization too has decided to invest in Equities. The inflow of money from the domestic players into the equity market is the main reason for the rally in mid-cap stocks.

Commodity Market The expectations of Federal rate hike in September led to renewed strength in dollar, pressurizing gold prices. Gold price is down by 7.6% with China announcing an increase in its gold reserves. Crude oil futures fell for a sixth straight week. Demand for oil from China has also slowed down. Iran could be adding 500,000 barrels of oil per day once sanctions are lifted. US crude oil inventories is also high. US gasoline consumption is also expected to slow as the summer travel season is coming to an end. Crude oil to bring down the prices of synthetic Rubber being it’s by product. The crude is hovering at $50/barrel.

This will result in the fall in prices of tyre and non-

Fig: Various Indices during the week

Among the top performers were Jai Prakash Powers and Jai Prakash Associates with (28.1%) and (23.5%) gain. Among the losers were JSW Energy and HCL Tech with (-8.7%) and (-5.8%).

11 | A U G U S T 2 0 1 5

tyre industry. *For Table, please refer to Page 10.

Consumer Good(FMCG) has decided to set up two

Currency

greenfield plants with total capacity of 100000

Currency USD

63.81

EURO

70.03

GBP

98.89

AUSD

47.32

100 JPY

51.37

RENMB

10.34

tonnes per annum, near Erode in Tamil Nadu and the other in Bengaluru, Karnataka.

Company is also

expanding its production capacity in Gujarat unit. Capital First (412.65), Non-Banking Finance Company has posted 59% rise in its profit after tax on a YoY basis. This was helped by steady growth in assets under management (AUM) and control on operating costs.

Economic Pulse

Hero MotoCorp (2660.50) has reported its numbers

The Reserve Bank of India has left the rates unchanged.

for the first quarter ended June 30, 2015. The

However, it has suggested better growth prospects

company has reported a 33% surge in its net profit

ahead with low inflation and rate cuts in future while

on a YoY basis. The operating profit during the

closely monitoring the data.

Public Sector Banks

period rose 44% YoY. Bharti Airtel (411.70),

(PSBs) saddled with bad debts, will get Rs.70000 cr

quarterly results for the first quarter for FY 16

over a period of four years. The Finance ministry has

reported a 40.2% jump in the net profit at Rs 15bn.

sought parliamentary nod for capital infusion through

The major chunk of profit was from tower business

supplementary demand for grants. Coal India has

and mobile data.

prepared a roadmap for achieving a coal production

Conclusion

level of about 908 MT (million tonnes) in 2019-20 as against the current production level of 494.23 MT. The

Though the stock market closed in red but

company accounts for over 80% of the domestic coal

comparatively

production. National Thermal Power Company (NTPC)

markets. The volatility in the commodity market and

is exploring options to manufacture solar equipment as

US Federal decisions may create ambiguity in the

part of the state owned power producer strategy. It is

trading patterns of investors. However investors

planning to set up a 1000 MW per annum

should focus on long term stocks and not get

manufacturing capacity. The company has also given

vacillated by short term swings in the market

its commitment to reduce the dependence on fossil fuel to 56% by 2032.

Corporate Pulse Britannia Industries (3201.60), a Fast Moving Consumer Good(FMCG) has decided to set up two 12 | plants A U G Uwith S T 2total 0 1 5 capacity of 100000 tonnes greenfield

per annum, near Erode in Tamil Nadu and the other in

performed

better

in

emerging

FINANCIAL INCLUSIONS IN INDIA

CAN FINANCIAL INCLUSION CATCH UP THE POPULATION GROWTH RATE

-Jatin Sharma

Banks are the vehicle of progress in any economy, they

group promoted value industries did the same as well

stimulate the finances of industries, supplement

for unspecified reasons. Briefly, the assessment

purchasing power and aid the government in its

process of the applicants included analysis of

development expenditure. The level of development of

financial statements of the entities over a 10 year

banking industry in any economy goes a long way in

period, proposed business model and applicants’

telling about the level of development of the economy.

capabilities for running a bank.

Indian banking scene has been characterised by banks

On April 2, 2014, RBI granted in-principle licenses

focussing majorly on metros, tier-I and tier-II cities and

to IDFC Ltd. and micro lender Bandhan financial

this has resulted in a neglect towards rural areas, which

services. In-principle license is like a testing license

comprise of roughly 70% of the Indian population.

valid till a period of 18 months. During these

India has twenty seven state-run banks and twenty two

eighteen months the applicants have to adhere to the

private sector banks. The ratio of branches to adults is

stipulations of the RBI as stated in the final licensing

only about one-fourth of that of Brazil. This grave

guidelines, released on twenty third December by the

shortage leaves about half of the population out of the

RBI. The licenses for the commencement of banking

banking system. The last time bank licenses were issued

business as stated under section 22 of banking

was way back in 2004 and the banks that received them

regulation act, 1949, will only be granted after

were YES bank and Kotak Mahindra bank. With these

eighteen months. Till this time the applicants are

two banks the tally of nationalised banks in India

barred from doing banking business and have to

reached to twenty seven. Recognizing this problem Dr.

complete the legal process of acquiring approvals,

Pranab Mukherjee (then finance minister) announced in

arranging capital and other requirements as

his 2010 budget speech the initiation of a new licensing

stipulated by the new final licensing guidelines. The

procedure to give an impetus to corporates seeking bank

entities that did not qualify for the final bank licenses

licenses. In 2013 RBI governor, Dr. Raghuram Rajan

this time can apply later on in future for suitable

set up a committee under the chairmanship of Bimal

licenses in the proposed framework.

Jalan, ex-governor of RBI. Twenty seven applications for banking licenses were received which included well know names like the Birla, the Anil Ambani group, Larsen and Toubro and the Bajaj Group. Also in the

IDFC Ltd., the infrastructure development company, is most likely to start its banking operations by 1st of October with a few branches, said Dr. Rajiv Lall, CEO and MD of IDFC Limited. IDFC will be

fray were non-Banking financial companies (NFBCs)

demerged into IDFC bank for which shareholder’s

like LIC Housing Corporation. TATA group dropped

approval and RBI’s permission has already been

out citing stringent regulatory norms and Videocon group promoted did the same as well 13 | A U G Uvalue S T 2 industries 015 for unspecified reasons. Briefly, the assessment process

taken. Every shareholder of IDFC will get a share of IDFC bank. IDFC bank will focus on three areas wholesale, retail and rural banking. Bandhan

the initial years. Bandhan bank also has a special focus on the eastern and north-eastern states so as to help get these relatively less developed states into the mainstream. Bandhan financial services has raised a capital of Rs.1,020 from international finance corporation, Singapore sovereign wealth fund GIC and state run small industries development banks of India. This infusion has taken bandhan’s net worth up to Rs 2700 crores, well above RBI’s minimum capital requirement of Rs 500 crores for new banks.

Two new banks slated to open this year, twenty three more applicants under different stages of scrutiny by RBI and discussion of granting bank license to post offices with high-level advisory committee are good taken. Every shareholder of IDFC will get a share of IDFC bank. IDFC bank will focus on three areas wholesale, retail and rural banking. Bandhan financial services, the largest microfinance institute in the country will also roll out its banking services on August 23rd. The company’s head office is in Kolkata and it plans to open 500 to 600 new branches and extend its network from 22 to 27 states of India. Bandhan financial services has a loan book of Rs.9500 crore currently which they want to take to Rs.11,000 crores and increase their customer base to 10 million from 6.4 million currently. The core focus of the Bandhan bank will be retail, rural and MSMEs (micro, small and medium enterprises). All existing businesses and clients will be absorbed under the new bank. Chandra shekhar ghosh, chairman and managing director of Bandhan financial services, wants to establish a viable bank for the bankless and will follow a conservative approach in the initial years. Bandhan bank also has a special focus 14 | A U G U S T 2 0 1 5

on the eastern and north-eastern states so as to help get

signs for the world’s second fastest growing economy. This new impetus in the banking sector along

with

complementary

schemes

of

the

government like mega financial inclusion plan “Jan dhan yojna” has the potential to write a new chapter of the Indian growth story. Although some level of caution also has to be exercised to ensure that we don’t create economic problems generally associated with availability of abundant cheap credit. RBI needs to approach this situation of licensing with the right mix of conservatism and optimism so as to take advantage of these favourable economic situation. A greater focus on rural banking and MSMEs can go a long way in helping the government to meet the millennium goal of reducing poverty by a considerable amount.

INDUSTRY WATCH

FORTNIGHTLY FOCUS: HOSPITALITY INDUSTRY

-Sakshi Issar

The Statler Hotel in Buffalo, New York, built in 1904,

be providing them with accommodation, a meal or a

was the first hotel in the United States to have running

cocktail or even entertaining them. But it is all about

water and a private bath in each room. Taj Mahal

customer service and providing the best experience

palace, Mumbai was the first in India to have electric

possible for the customers.

light as well as install and operate a steam elevator.

Vital Trends

It can be inferred from the above trivia that Hospitality sector has emerged from very humble origins.

However, it is now one of the most important revenue generating industries for countries across the globe.

Coupled with the closely associated tourism industry, hospitality industry contributes to 6.8% of India’s GDP.

Indian names like Oberoi, Taj, Leela and ITC have already captured a big market share and international brands are also on a spree of expansion. India hosts more than 50 hotel brands which are expanding even in the smaller towns. This upward growth trend can be noticed as per the following statistics:

India has a mobility of more than 1.8 billion domestic

Vital Stats

travelers and 6.9 million international tourists making the hospitality industry as one of the most alluring investment options. The present government is putting efforts to further boost the industry by promoting it through the Make in India Campaign inviting both domestic and international investors to reap the benefits

      

CAGR (2006-2015) : 10.5% Industry Revenue(2014-15): 5-8% RevPAR (2015) Growth: 7-8% Occupancy Growth(2014): 5% Average Room Rate Growth(2014): 3% India’s Global Share: 1.56% receipts GDP Contribution(2015) : US$44.2 billion

from this sunrise industry.

What is Hospitality Industry?

Most people think that hotels alone belong to the hospitality industry, but hotels are only one sector of this industry. Many forms of transportation that cater to tourists are also part of this business world. For example, this niche includes airlines, cruise ships and even fancier trains. Restaurants, general tourism and event planning also belong to this niche.

Hospitality is the business of helping people to feel welcome and relaxed and to enjoy themselves. It could be providing them with accommodation, a meal or a U G Uentertaining S T 2 0 1 5 them. But it is all about cocktail15or| Aeven

customer service and providing the best experience

Growth Drivers Internal Factors

External Factors

Innovations

services, competition in the market is growing increasingly fierce thus leading to a higher degree of

Indian hospitality industry has come a long way from

professionalism in the industry, and with the spread

only having government run ITDC hotels and Boarding

of established hospitality brands, guests are

and Lodging facilities to having heritage palaces

increasing their demands and expectations on the

converted to luxurious hotels by the giants of the

whole industry, thus creating an environment

industry. Everyday a new type of tie-up, merger or new

conducive to innovation.

class of hotels is emerging in India. It is no surprise that in this time of maximum potential growth for the

Another trend that we can observe recently is the rise

industry, the hotelier companies have put together their

of substitutes of the hotels in the form of service

best creative and sumptuous ideas on the platter for up

apartments. The latest wave is such that booking

for grabs for the customers. Of the major international

hotels in advance is a practice long forgotten. People

hotel chains Sheraton, Hilton, Hyatt, Radisson,

now often book hotels 48 hours prior making the trip.

Marriott, and Le Meridien are already firmly

Hence, short notice bookings cost more. To avoid

established in the Indian markets and steadily

these additional costs, customers have switched to

expanding.

alternate options.

With more international players and their sophisticated

Government polices

services, competition in the market is growing

Government realizes the importance of this industry.

increasingly fierce thus leading to a higher degree of

It also understands that helping out the private

professionalism in the industry, and with the spread of

players in this niche segment will help expand the

established hospitality brands, guests are increasing

tourism and hospitality industry of India. Hence,

their demands and expectations on the whole industry,

under the Make in India campaign, various industry

thus creating an environment conducive to innovation.

friendly policies have been proposed and enforced.

Another trend that we can observe recently is the rise of

An investment-linked deduction under Section 35

substitutes of the hotels in the form of service

AD of the Income Tax Act is in place for establishing

apartments. The latest wave is such that booking hotels

new hotels in the 2-star category and above across

in advance is a practice long forgotten. People now

India, thus permitting a 100% deduction in respect of

often book hotels 48 hours prior making the trip. Hence,

the whole or any expenditure of a capital nature

short notice bookings cost more. To avoid these

excluding land, goodwill and financial instruments

additional costs, customers have switched to alternate options.

With more international players and their sophisticated services, competition in the market is growing 16 | A U G U S T 2 0 1 5

increasingly fierce thus leading to a higher degree of professionalism in the industry, and with the spread of

incurred during the year.

LATEST INTIAITIVES BY GOVERNMENT PRASAD •National mission on piligrimage rejuvenation and augmentation drive

PRASAD

Road Ahead The Hospitality sector is expected to manifold due to consolidation of the unorganized hotels as well in the future. Due to favorable government policies, more foreign investors can be expected to approach the

SWADES DARSHAN •Integrated development of theme based circuit parks

Indian sector in their hunt to make profits. Due to a number of new entrants, the overall quality of the hospitality

Challenges Even though the sector portrays a rosy picture of the industry, it is important that we take off our rose tinted glasses and also acknowledge the challenges of the sector. It is surprising to know that out of the four major group of hotels comprising IHCL, EIH, Leela and ITC only EIH and ITC managed to make a profit, whereas Taj and Leela have made a cumulative loss of INR2500.

The reason behind such statistics could be the gap between demand and supply. Some of the biggest

services

would

improve

as

the

competition would increase. It has been observed that budget hotels are trending the most as most of the tourists these days are young and belong to the strivers class of customers. To cater to the needs of this segment most group of hotels have started a chain of budget hotels as well. For instance, French hotel group Accor is mainly focusing on its budget hotel brand Ibis instead of its other luxury brands.

Marriot has also introduced their budget hotel brand Fairfield Inn to the Indian market.

brands are also operating on less than 50% occupancy.

Hence, it would be correct to say that it is an exciting

Smaller brands are struggling for their survival.

time for the hospitality industry. However, it will

Investment is huge, operating cost is too high and return

take earnest efforts of both government and private

on investment is very low. Most of the new hotels

players in the market to extract the maximum out of

haven’t met their forecasted breakeven periods. The

the available and ever growing customer base.

relations between management and hotel owners are stressed as the later expect high return on investment.

This situation is resulting in break ups between some of the old alliances. Recent Split up between Leela and Kempinski can be a good example. It has been observed that the overall occupancy rate has decreased from 61% - 57% in 2013-14 and revenue par available room has reduced from INR 6,100 to 5700.

17 | A U G U S T 2 0 1 5

FY 16 CAPITAL OUTLAY

INDIAN GOVERNMENT’S SPEND CUSHION

-Ishan Gupta

For the first time since 2010-11 the Indian government

subsidies. In the first two month of FY 16 the

may be able to increase its revised expenditure from the

government witnessed a 30% reduction in actual fuel

budgeted expenditure in a fiscal year.

subsidy against the allocated fuel subsidy. Further,

Rs. lakh crores

the global meltdown in commodity prices gives the 25 20 15 10 5 0

government more headroom in other subsidies like fertilizer and food. The government is also streamlining 2010 2011 2012 2013 2014 2015 -11 -12 -13 -14 -15 -16

Budgeted 11.09 12.58 14.91 16.65 17.95 17.77 Revised

12.17 13.19 14.31 15.91 16.81

-

procurement

and

distribution

operations, and hopes that the rollout of direct cash transfers scheme for food subsidies would lead to an additional saving of Rs 4-5 thousand crore.

To give itself some more fiscal space the government

Over the past three years, for one reason or the other,

also delayed the fiscal consolidation road map by

successive governments (Both UPA and NDA) have

easing the deficit target, for 2015-16, to 3.9% of the

not been able to increase the revised estimate. A large

GDP against the earlier target of 3.6%. This move

chunk of the government’s expenditure goes on various

alone raised Rs. 70,000 crore for the government.

subsidies. The major budgeted subsidies for the year

There is also a reduction in the union government

totaled about Rs 2.27 lakh crore - Rs 72,968 crore for

spending activities. As per the 14th finance

fertilizer subsidy, Rs 30,000 crore for fuel subsidies and

commission recommendation about 10% of the

about Rs 1.24 lakh crore for food subsidies. What

centre’s tax resources will be given to the states for

changed this time that led experts and insiders to

health and education expenditure which the centre

believe that this government might have a Rs. 1 lakh

earlier paid for. They have also delinked eight central

crore cushion.

schemes and partially removed 24 schemes that

It’s all thanks to the volatile (I use that word because

would now run with shared funding.

more than free market economics it is an OPEC created

Moving from expenditure to revenue side, there has

situation) crude oil prices that are helping the

been a substantial and unexpected increase in the

government mop up this fund. India imports ~70% of

indirect tax collection for the April-June quarter, up

its crude oil requirements and with the global oil prices

by ~37% to Rs. 1.54 lakh crore. Other than that, the

remaining around ~$55 a barrel (budgeted around $70

expiration of tax exemption on excise duty given to

per barrel in calculation of subsidy bill), the

auto and other consumer durables also helped the

government is in a position to save a lot on fuel

government. Moreover, this government has also

subsidies. In the first two month of FY 16 the

raised excise tax on petroleum products between

government 18 | A witnessed U G U S T 2 a0 130% 5 reduction in actual fuel

November 2014 and January 2015 and increased the

subsidy against the allocated fuel subsidy.

service tax from 12.36% to 14% (Like we don’t pay

raised excise tax on petroleum products between

plans to go ahead with it. India passed the Fiscal

November 2014 and January 2015 and increased the

Responsibility and Budget Management (FRBM) act

service tax from 12.36% to 14% (Like we don’t pay

more than a decade ago in 2004. The act limited the

enough tax already).

fiscal and revenue deficit binding the union

So all in all, this cushion was not a result of radical changes by the current government, but a gift in the form of reduced commodity prices, reduced spending, higher tax levy and collection, and delaying the already delayed fiscal consolidation roadmap. Coming to where the fund will be put to use. The government plans to use

government to stick to the deficit targets. As per the original act the deficit had to be reduced to 0.5% of the GDP by 2009. Yes the 2008 crisis altered a lot of things and government expenditure was necessary to support the economy. But even after 6 more years we are nowhere near the target.

this cushion mainly for infrastructure projects, social

A high fiscal deficit leads to a depreciation of the

sector schemes and fiscal consolidation (if the need be).

currency. It is good for the export side of the

Coming to Infrastructure, the government plans to allocate the major portion (~ Rs 70,000 crore) for infra projects. It is important for a country like India which is already lagging behind. Further, Successive governments have been spending a very small fraction of the budget on capital expenditure (~10-11%).

economy, but not for import and especially not for India whose imports majorly comprises of oil and gold, two inelastic commodities. So a high fiscal deficit leads to rupee depreciation, which again increases the subsidy burden on the government.

Another problem can be deterioration in the agricultural sector. A global commodity rout means

Breakdown

low price of agricultural produce. The small part of

The improvement in government finances is a good

it that used to come to the farmer gets even smaller.

thing as it is an important part of the revival and

This will only increase the government’s headache

stabilization mechanism of an economy. However, one

because there is no decrease in their expenditure and

must be open minded enough to realize what this could

they are not earning enough to pay for it. The current

lead to. Firstly, this fund is entirely generated from

state of sugarcane farmer will only turn out to be a

external or one-off factors. It is a one-time gain and will

prelude for the disaster to come.

be taken care by the finance minister in the next budget

It is good that government has set aside Rs. 30,000

(Lower allocation for subsidies). There is no proper

crore for fiscal maths, but then again any political

management of finances on the ground level which

priorities can eat this up, making government

every taxpayer would like to see.

finances more vulnerable to the global commodity

Secondly, the government has appropriated the

markets.

maximum portion to one particular sector. There is a small amount left for other things if the government 19 | A U G U S T 2 0 1 5

COVER STORY

DIMINISHING GLITTER

-Supriya Gaur

From the last few weeks the affair that has been

traded in US currency, an increase in value of dollar

catching the attention of almost everyone is the fall in

accompanies a decrease in its price.

gold prices. The yellow metal has lost its shining after

The crisis in international market has also negatively

ruling the market for approximately 5 years. The

affected the price of gold. The downfall in the

sudden setback by 3.6 per cent resulted in the lowest

Chinese economy has led to massive selling of 30

nd

price of gold at Rs. 24,677 per 10 grams on 22 July,

tonnes gold at Shanghai Gold Exchange because

2015.This dramatic decline has in turn lead to an

people in market wanted to pay off the debts and

increased demand of gold among the consumers who

liquidate every possible investment they had done.

consider it as an investment. From being the king of the

As a result the price of gold dipped to its lowest due

market in August, 2013 pricing at about Rs. 35,074 per

to excessive supply than demand and forcing people

10 grams, the shine of this lucrative metal is somewhere

to sell at lower prices. Iran’s nuclear deal with the

lost since mid of 2015.

West has led to reduction in conflicts in those regions

Now the curiosity shifts to the factors leading to such a

which in turn indicated the gold prices to be lowered.

rapid decline. The dwindling in the value of gold can be

Further, Greece has been in the danger of being

attributed to several reasons. The prime reason being

removed from Euro list. It has a huge amount of debt

the decision of hike in interest rate by Federal Reserve,

which it dealt with by sealing a last minute deal with

the central banking system of United States (US). Due

its creditors thus imbibing less value of gold.

to growth in US economy the Federal Reserve has

Moving to the factors internal to Indian economy, the

announced a 0.25 per cent hike this year. A rise in

government and Reserve Bank of India (RBI) have

interest rate means that borrowing cost will be high.

taken several measures to curb gold imports resulting

Gold is considered to be an asset and in case of rise in

in lowering its prices and making it as an option for

rate, returns would be more leading to huge investment

investment asset. This reduction has attracted

in forms other than buying gold. As a result to maintain

consumers leading to healthy demand and high

the shine of gold its price had to be lowered. Apart from

consumerism. The unpredictable pattern of monsoon

this, the US dollar is another hitting factor leading to the

is also a matter of concern. India is the second largest

fluctuation in gold prices. Nowadays dollar has

consumer of gold out of which rural population

consolidated its position in market due to revitalization

contributes to about 60% of overall buying of

of US economy which is evident from lowering in the

products. With a good monsoon over the year the

unemployment rate. The Dollar value has an inverse

demand for gold would increase especially during

relationship to the commodities price and since gold is

the festive season. On the other hand, lower levels of

traded in US currency, an increase in value of dollar

monsoon would negatively impact the demand for

accompanies decrease 20 | A Ua G U S T 2 0in1 5its price.

gold thus leading to an increase in its price.

According to the facts, India has been the world’s

10 gram to compensate the sharp fall in prices.

Price(Rs/10 gm)

Gold Price(July,2015)

Moreover, higher import bills negatively affect the

27,000

current account deficit because of the import values traded in US currency, an increase in value of dollar exceeding the export values. Since there is a accompanies a decrease in its price. reduction in gold price so import bills will plunge The crisisin inainternational marketaccount has also negatively resulting favorable current situation.

26,500 26,000 25,500 25,000 24,500 0

10

20

30

40

Day

monsoon would negatively impact the demand for gold thus leading to an increase in its price. According to the facts, India has been the world’s largest consumer of this gilded metal in 2014 and second largest after China in the first quarter of 2015. A substantial reserve of gold in the domestic market urged a need to cut down the prices to improve the scenario for trading of this commodity.

Impact on Market India has a voracious appetite for gold and is one of the biggest importers of this glittering metal and sudden crash in its prices has certain positive outcomes for the market. Since India has a huge demand of gold from either section of society: rural or urban a decline in price will for sure attract a large number of consumers who would want to invest in gold keeping in mind the future benefits, thus leading to lower import bills and independence from fear of inflation to government and RBI. This will also bring stability in Indian Rupee.

The import tariff value is the base price at which customs duty is determined to prevent under-invoicing.

It is revised on a fortnightly basis taking into account global prices. The government has brought down the import tariff value to $354 per 10 gram from $376 per 10 gram to compensate the sharp fall in prices.

21 | A U G U S T 2 0 1 5 Moreover, higher import bills negatively affect the

affected the price of gold. The downfall in the In addition to this, government can invest an Chinese economy has led to massive selling of 30 increased sum of money to boost infrastructure tonnes gold at Shanghai Gold Exchange because spending and reduce direct taxes. These efforts will people in market wanted to pay off the debts and help in economic growth of the nation along with a liquidate every possible investment they had done. balanced fiscal account situation. Also, the decline in As a result the price of gold dipped to its lowest due the price of gold has increased the demand among to excessive supply than demand and forcing people consumers who are interested in investing money in to sell at lower prices. Iran’s nuclear deal with the gold for future aid. Most of them are buying gold to West has led to reduction in conflicts in those regions merchandise it when the price again speeds up. which in turn indicated the gold prices to be lowered.

Further, Greece The Road Aheadhas been in the danger of being removed from Euro list. It has a huge amount of debt According to Indian Ratings and Research (Indwhich it dealt with by sealing a last minute deal with Ra),”The movements in gold prices will largely its creditors thus imbibing less value of gold. depend on the US interest rate decision. In the event Moving thehike, factors internal Indiancould economy, the of a US to rate global goldtoprices drop and government andUSD Reserve Bank of India (RBI) have range between 900 an ounce to USD 1,050 an taken measures to curb gold imports resulting ounce.several As such, the domestic price of gold may in lowering prices and making it as to an 24,000 option for decline and its range between Rs 20,500 per investment asset.

This levels reduction attracted 10 grams from the current of Rshas 27,000.” consumers leading to healthy demand and high Moreover the reduced price has created a different consumerism. The unpredictable pattern of monsoon trend among the rural and urban markets. Rural is also a matter of concern. India is the second largest consumers on one hand are selling the gold consumer of gold out of which rural population commodities to generate cash which would help contributes to about 60% of overall buying of them to survive in case the monsoon does not products. With a good monsoon over the year the perform in an expected manner in August and demand for gold would increase especially during September. Manish Jain, chairman of the All India the festive season. On the other hand, lower levels of Gem & Jewellery Trade Federation quoted, monsoon would negatively impact the demand for "Jewellers from rural parts of Tamil Nadu, Gujarat, gold thus leading to an increase in its price.

Maharashtra and Odisha have informed us that According to the facts, India has been the world’s

the price of gold and the Indian Rupee would not have much greater impact. So if you keep on waiting for the price to fall a little more, you might lose the golden opportunity to take possession of the yellow metal when it certainly is not sparkling the way it used to and might end up empty pocket during the festive season in October and November. So before making a decision to invest now or later just have a look at all the pros and cons of market statistics as well the investors analysis.

Gems & Jewellery Trade Federation quoted, "Jewellers from rural parts of Tamil Nadu, Gujarat, Maharashtra and Odisha have informed us that farmers are partially offloading their holding in gold. They feel that gold prices may decline further and they do not want to book losses”. On the other hand, urban markets are flooded with buyers of fading metal who want to procure it before it regains its shine again.

Now the most important question quivering in the minds of each person, ranging from investors to sellers and even the common man, is to what extremity can the gold prices fall. Various analysts and investors estimate that it might get down to ₹20,000 per 10 grams but that is not what the real scenario can be. Even if the US Federal hikes the rates and US economy strengthens

22 | A U G U S T 2 0 1 5

“DIMINISHING GLITTER, ENRICHING LIVES”

A GAME CHANGER?

IRAN’s NUCLEAR DEAL IMPACT OVER INDIA

-Abhinav Banerjee

It dates back to 1950 when Iran began a civilian nuclear

The US also had drones to spy on the suspected

program lead by Shah Mohammed Reza Pahlavi. Under

nuclear sites in Iran and be updated.

the agreement, US agreed to provide a nuclear research

In April 2013 the defense deptartment of the US was

reactor in Tehran.In the early 70`s the Shah created the

expected to finalize a $10b arms deal with Israel

atomic energy organization of Iran. And finally the

Saudi Arabia and the UAE to help them counter any

contract was signed in 1976. Unfortunately in Nov`79

future threat from Iran. On 24th Nov 2013 we mark

PM Bakhtiar the new leader was not interested in

an important event in the course of nuclear program

nuclear program and thus the nuclear cooperation

of Iran known as the Geneva interim agreement. It`s

between Iran and the US broke down completely. With

officially named the joint plan of action which

the Iran- Iraq war building up in the 80`s Ayatollah

constitutes a pact signed between Iran and the P5+1

Khomieni the then supreme leader of Iran secretly

countries in Geneva, Switzerland. It consists of a

restarted Iran`s nuclear program.

short-term freeze of portions of Iran's nuclear

During the mid-90`s Iran and Russia signed a nuclear

program in exchange for decreased economic

contract worth $800m to complete construction on one

sanctions on Iran. This eventually led to the Joint

of two light water reactors at the Bushehr nuclear plant.

Comprehensive Plan of Action in July 2015.

Due to the fear of American invasion that Iraq faced on

Present Scenario

grounds of holding weapons of mass destruction, Ali Khamini, still a powerful leader that time, ordered a suspension of the deal in 2003. Days before Iran was supposed to suspend enrichment of uranium president Ahmedinejad initiated a heavy water production plant in ARAK 120 miles from Tehran putting Iran on the front seat to obtain plutonium, fuel used in nuclear weapons. Soon followed the famous US-ISRAEL cyber-attacks on Iran in 2008, which resulted in the crashing of the centrifuges with the engineers having no clue that the plant was under attack. There were instances where unidentified attackers on motorcycles attacked top nuclear scientist killing two of them. One of whom was Mostafa Ahmedi Rosha, a scientist from Netanz site. Iran blamed US and Israel for these attacks.

The US23also had drones to spy on the suspected nuclear |AUGUST2015 sites in Iran and be updated.

On 14th July, 2015, an agreement was reached between Iran and major world powers to limit Tehran’s nuclear ability in return for lifting international oil and financial sanctions.

The Agreement Iran has agreed to transform its deeply buried plant at Fordo into a center for science research. Natanz Uranium Plant is to be cut back rather than shut down. Close to half the current number, 5,000 centrifuges, for enriching uranium, will remain spinning there. Iran also has agreed to limit enrichment to 3.7 percent and to cap its stockpile of low-enriched uranium at 300 kilograms, for 15 years, which is considered insufficient for destructive purposes. The Arak reactor will also be redesigned so as not to produce weapon grade plutonium. The

which is considered insufficient for destructive

Exporting shipments to Iran is currently expensive

purposes. The Arak reactor will also be redesigned so

due to high shipping charges. With the removal of

as not to produce weapon grade plutonium. The fuel

sanctions, it would not only be easier but also

which was used for running the reactor could also be

cheaper to export to Iran. India has been exporting

used to produce bomb, will be shipped out of country.

automobile components, tools, motors and chemicals

To ensure Iran won`t cheat

to Iran. While India's trade with Iran appears to have long-term benefits in the post-sanctions scenario,

Iran has agreed to provide the International Atomic

businessmen are concerned that some areas will be

Energy Agency greater access and information

hit hard.

regarding its nuclear program, and to allow the agency to investigate suspicious sites or allegations of covert

"Indian exporters will have to compete with Eastern

facilities related to uranium enrichment anywhere in the

European manufacturers who produce low-end

country

products like spanners, hand tools and auto parts.

Since the value of the euro has depreciated in the last

Impact on India

few years, we will be facing stiff competition from

This historic deal between Iran and major world

European manufacturers," said Ajai Sahai, Director-

powers, has enabled Tehran to restore normal trade with

General of the Federation of Indian Export

many countries. But before the deal was reached, and

Organizations.

despite sanctions, India was one of the few countries doing billions of dollars of trade with Iran. Current bilateral trade between India and Iran is about $14bn (ÂŁ8.96bn). India primarily imports oil from Iran, but has been hampered by restrictions placed by global powers.

There are concerns in Delhi that a more assertive Iran will drive a hard bargain as it will have more diversified customers and partners from around the world.

Indian

companies

had

explored

and

discovered oil and gas in Iran's Farzad B gas field in

Due to the sanctions, India had been paying Iran in

2008 and had already invested around $100m to

Indian rupees, with the money kept in an Indian

develop the facility but production was stalled due to

account. In fact, the country is yet to release an

sanctions. After dragging its feet for years, New

estimated $6bn in pending oil payments to Iran. This

Delhi rushed in a delegation to discuss the project, as

means that the payments which were made to Iran had

signs emerged that sanctions on Iran would be lifted

been in the Indian economy as long as Iran didn’t

after the nuclear deal. But Iranian press reports say

withdraw. Now, India is free to import oil from Iran but

Tehran has rejected India's proposal and has plans to

will have to pay in dollars.

auction the site instead. If there is a tender process, it is going to be difficult for Indian companies to compete with France, USA, and China who, with abundant resources and the latest technology would

24 | A U G U S T 2 0 1 5

also be

is 90 days other than other oil exporters giving 30 days credit period. An addition of 60 days of credit can lift the Gross Refining Margin by $1 per barrel.

Also, insurance costs of shipment would reduce.

MRPL, Essar Oil and IOC imported 10-30% of total crude requirement from Iran.

Aban Offshore Aban Offshore Ltd. is a Chennai based company Fig; Hassan Rouhani

which provides offshore drilling services for Indian oil companies. It has now ventured into foreign

abundant resources and the latest technology would

waters and working for Iranian Companies. It

also be competing. Russia and China may try for

currently has 5 rigs in Iran working for 35% of its

economic and business gains due to the goodwill of

revenue. Relaxation of sanctions would improve

them trying to be supportive of Iran.

Aban’s working capital situation as there would be

India also signed a contract of $233m to supply more

swifter payment receipts from Iran. The company

than 150,000 tons of rail tracks for developing Iran's

also has 9% insurance cost, which would also

railways. But the project is in trouble with reports

decrease due to lower business risk.

saying “Iran wants to renegotiate the deal to bring down

ONGC

the prices as the euro has declined against the dollar.”

Tehran also pointed out that once sanctions are lifted, it will get better deals from other countries, like Turkey.

India has now reportedly agreed for financing the entire scheme under a special mechanism. India has now reportedly agreed for financing the entire scheme under a special mechanism.

Indian refineries Indian refineries imported 7.3% of total imports of oil last year, which after the relaxation of sanctions will further help reduce crude import costs. The shipping costs will be reduced as the travel time would reduce and further help in trade. Credit period offered by Iran is 90 days other than other oil exporters giving 30 days credit period.

25 | A UAn G Uaddition S T 2 0 1 5of 60 days of credit can lift the Gross Refining Margin by $1 per barrel. Also,

Oil and Natural Gas Corporation is a Dehradun based PSU. It had submitted master development for Farzad B gas field in 2012 for Iran. It has 21.68 trillion cubic feet reserves of gas. It would have an upper hand in getting development rights once the deal is materialized.

PORTFOLIO RECAST

FIIs CHERRY-PICK THE PSU BANKS

-Sandhya Adhavan

The FII’s are the Foreign Institutional Investors, who

FIIs cut stake in banks

are registered outside India and make investments in

“The main reason why FIIs bought PSU banks in

India. They invest in the primary or secondary capital

early months following the 2014 general elections

markets through Portfolio Investment Scheme (PIS).

was because there was a widespread view that the

The main source through which they invest is the

government will not only professionalize but also

issuance of Participatory Notes (P-Notes) also known

recapitalize these banks,” said Saurabh Mukherjea,

as Offshore Derivatives. The reason why the FIIs

CEO, Ambit Capital.

(Foreign Institutional Investors) intend to invest through P-Notes is because it provides anonymity, that is, they can invest in the Indian stock markets without registering themselves with SEBI, the capital market regulator.

As the months went by, they realized it’s not easy to recapitalize the banks. Specialized talent is not there.

Also, there is neither the money nor the political willingness to do it. So the FIIs started to get rid of their stakes in the PSU banks. In fact, they have

These FIIs are the key drivers of Indian stock market

become the net sellers (on a day to day basis) from

because they pool large sum of money which make

net buyers. The term net buyers refers to the foreign

them the major sources of liquidity in the Indian

investors who pour in huge amounts into the stock

markets. Their investment in our stock markets reflects

market than they take out and net sellers are those

the high confidence and also a healthy investor

who sell more than they buy. They have trimmed

sentiment.

their exposure about 80%, that is, they reduced their

Due to globalization, the role of the Foreign

stakes in 22 banks and increased in 5 banks.

Institutional Investors have become very significant.

Underperformance by PSUs

But why is their investment making a huge impact on our economy? What are the possible benefits that we can get through their investment? The reason being that the developing countries like India has a chronic shortage of capital. The entry of the FII will bridge the investment gap by bringing in more capital. However,

"PSU banks have been gross underperformers in the last two years. Some banks even posted their first loss in a decade in the fourth quarter” said G Chokkalingam, founder and M.D, Equinomics Research and Advisory.

the FIIs have a negative impact on the economy as well.

This is due to two main reasons, one is that the credit

For instance, the FIIs are highly volatile in nature, even

growth is sluggish and second being the sharp

a small change in the economy would lead them to

increase in the level of NPAs (Non-Performing

destabilize the economy by making large withdrawals.

Assets). NPA refers to the bank loans that are likely

Plus they follow a herd mentality that is if one investor

to be defaulted if they are overdue for more than 90

26 | Athe U Gothers U S T 2follow 0 1 5 suit withdraws,

days. The bad loans can either be because of nonpayment of the interest or a part of the principal

to be defaulted if they are overdue for more than 90

is the largest aggregator of such loans has estimated

days. The bad loans can either be because of non-

that Rs.20,000 crore in bad loans has been put up for

payment of the interest or a part of the principal amount

sale so far this fiscal year, compared to Rs.12,000

or both. The other factors being a slump in the global

crore in 2012-2013. The sales of these assets are not

recovery and uncertainty in global markets. This trend

in exchange for cash, but for Security Receipts (SR).

is expected to continue at least for two quarters,

These receipts are issued to banks which would be

especially in revenue growth.

encashed when the loan amount is recovered.

Various banks have been hit by this sudden plummet of

Most loans which are outstanding are from the

revenue. SBI, country’s largest bank, hit a four quarter

medium-sized companies that have failed to

low of 11.54% at the end of June. Punjab National bank

restructure their debt through Corporate Debt

whose gross profit surged to 6.8% last quarter slumped

Restructuring (CDR) process. The Corporate Debt

to its lowest level. Foreign investors also brought down

Restructuring is a process which helps a company to

their stake in Indian Overseas Bank (IOB), wherein the

reduce their debt by decreasing the rates paid and

quality of the asset deteriorated due to 8.3% increase in

increasing the time of repayment of the loan amount.

NPAs in last quarter of 2014-15 one of the highest

This is done to revive the company and also to

among the PSBs. The same pattern was seen in banks

protect the interests of the lending institutions and

like Indian Overseas Bank, Canara bank and Bank of

other stakeholders. This recent trend of restructuring

Baroda as well. FIIs holdings hit a new low in the

the debt has created a new market for the Bad loans

quarter ending June. Incidentally, Canara bank’s net

and the banks have become more open to sell these

NPA slipped to an eight quarter low of 2.6% in April-

assets to the companies.

June. The average gross NPAs of the public sector banks stood at 5.2% for the quarter ending June while average Net NPAs came at 2.8%.

In short run, FIIs do not cause volatility in Indian markets. However, because of the high volatility in the Indian market, it is difficult for the FIIs to retain

Compared to the public sector banks, the private sector

the investment and therefore they withdraw money

banks had performed well in June Quarter.

from the Indian market making the losses bigger for both domestic and foreign investors in India.

Role of asset reconstruction companies Due to the asset quality issues, the net profit margin of the banks are decreasing. The banks are taking recovery measures

such

as

selling

the

NPA

to

asset

reconstructing companies and also the government has permitted the PSBs to raise funds from the market. The asset reconstruction company, Arcil (India) Ltd., which is the largest aggregator of such loans has estimated that 27 | A U G U S T 2 0 1 5

Rs.20,000 crore in bad loans has been put up for sale so

RELIANCE 4G SPECTRUM

TASTING NEW WATERS

-Chestha Kumar

Reliance communication established in 2002, is now

Ambani, while Anil Ambani lags behind with a

the fourth largest telecom operator in India. In the year

worth of $8.4bn. A rift developed over the following

2006, Nokia and Reliance had joined hands to market

years between the brothers over their inheritance and

the Nokia 1255 mobile handset in India. Rcom also

the management of the group, and they ended up

entered into a billion dollar contract with the Alcatel-

parting ways and dividing the family business.

Lucent in a bid to improve network performance and

Telecom Scenario in India

customer experience to offer next generation telecom solutions across multiple devices and platforms.

The telecom sector in India remains one of the key business grounds for telecom giants like vodafone-

Dhirubhai Ambani’s (1932-2002) rags-to-riches story

group plc, the second largest operator after China

remains one of the most retold legends of corporate

Mobile Limited and the home turf of the world's third

India and is an inspiration to the youth of this nation.

largest telecom operator Bharti Airtel Limited, based

He started the group as a textile company which grew

on subscribers. However, the Indian telecom market

to become India's biggest conglomerate and was an

is characterized by one of the lowest call tariffs in the

Indian business tycoon who founded Reliance

world due to the growing competitiveness with the

industries (1966) in Bombay with his cousin and

increased participation by some of the largest players

contributed greatly to the company's meteoric rise.

in the telecom global space. This is resulting into

Reliance is now ranked among the world's top 500

high losses and diminishing marginal profitability of

companies in terms of revenue generation. Dhirubhai

the operators in India. Government has approved 100

also founded Reliance Capital and Reliance Power and

percent foreign direct investment (FDI) in the

remained a dominant figure in the textile, petroleum,

telecom sector, meeting a key demand of the fund

power and infrastructure industries until his death 2002.

starved industry. The sector however lacks the

After the demise of Dhirubhai Ambani, (two brothers)

proper infrastructure, which has restricted its growth

Mukesh Ambani and Anil Ambani have been in a bitter

to only 2G and 3G network deployments while

feud which ultimately led to the split of the Reliance

developments in the LTE space is still lagging.

Group. This gave Mukesh control of oil and gas, petrochemicals, refining and manufacturing while Anil

Re-entry of RIL in Telecom Sector

took reign over electricity, telecoms and financial

Mukesh Ambani ,country’s richest man, according to

services. The property called Antilla, 27 storey home,

Forbes, re-entered the telecom sector in 2010 and has

which boasts three helipads and a health club is

already invested $ 15 billion in building the

estimated to be worth more than US$ 1 billion,

country’s largest 4G broadband network through a

represents the towering success of Mr. Mukesh

direct physical presence in over 1000 “Jio-centres”

Ambani, 28 while | A U GAnil U S TAmbani 2 0 1 5 lags behind with a worth

,with commercials operations to start in December.

of $8.4bn. A rift developed over the following years

Reliance digital would be a catalyst by making

direct physical presence in over 1000 “Jio-centres”, with commercials operations to start in December.

Reliance digital would be a catalyst by making available entry level to ultra-premium 4G LTE smartphones in driving the device ecosystem in India for Jio. Apart from the 1000’ Jio-centres,’ the company will have 500000 connectivity outlets and 1 million additional recharge outlets. To make it affluent, it’s going to use a two-pronged strategy for ensuring device-availability, using open market as well as selfbranded devices under its retail unit’s electronic arm.

The Jio-network will roll out with the coverage to about 80% of the country’s population. It has also engaged with global smartphone brands including apple, Samsung, Huawei and Xiaomi to ensure availability of 4G devices and pocket routers across price range.

Reliance, the only company which holds a pan India 4G license. The service will be 10-12x faster than the 3G networks.

What actually is JIO? Reliance Jio is supposed to provide broadband services to its customers via LTE in India 

The Battle Begins The Indian telecom sector is among the most competitive globally, with as many as 13 players across the country and seven-eight players in most major circles. For consumers it’s all about the lower tariffs and better deals and hoping for better service.

This creates a constant struggle on two frontspricing remains under pressure with predatory behavior every now and then and bidding for spectrum tends to be more aggressive, leading to higher payments and lower return on equity. Jio and the top three incumbents are more or less likely equals when it comes to holdings of spectrum. A comparison across bands and mix of the airwaves would see Bharti at the top; the Delhi-based telco has close to 16% of the total allotment and 80% of this liberalized covering the largest share of its revenue for 3g and LTE AT 98% AND 75% respectively.

There has been much debate around the data, which is poised to grow faster than voice, one view is that the data gives Jio and edge over its incumbents.

Therefore, it is undisputable that the launch of Jio will impact the mobile telephony market, it’s the

JIO- television: Set-top box running on android.

weaker operators that are likely to be under pressure

The service will have Live-television (Jio-play) and

and not the stronger incumbents. On the contrary,

video on demand (Jio world).

Jio's launch would be positive as it would boost the



Jio Drive: 100 GB free storage to subscribers

growth of data services currently constrained due to



Mi-Fi: The company’s customer premise equipment

supply side issues like limited spectrum and under-

will connect to a Reliance operated mobile tower

investment.

and provide local Wi-Fi network.

It will also include the launch of a suite of services including music streaming, video calling, instant messenger and payment services.

29 | A U G U S T 2 0 1 5

Path Ahead Reliance will also launch its own mobile apps to enable man of these services. The 4g infrastructure will also support its portfolio of multi-media digital services in education, health care, entertainment, payment and cloud-services. With these launches,

The above picture depicting that although the country today has six to seven operators per circle, the remaining three are weak suggesting the much talked about consolidation has already happened in consumer's minds.

will also support its portfolio of multi-media digital

these services are created by Jio itself, its ecosystem

services in education, health care, entertainment,

partners or anyone globally.

payment and cloud-services. With these launches, Reliance will not only be making its much anticipated entry to 4g mobile services, it is likely to corner a larger share of the media & entertainment market in India. The idea is to capture the living room of the consumer which is otherwise the undisputed territory of cable television.

Pan India 4g services on the reliance network could also give a leg-up to the digital economy in India. Other telecom operators like Airtel & Aircel have already launched 4g services in some circles. But the reliance Jio 4g service is expected to be on a much larger scale.

Jio's true success will be measured by a whole new generation of entrepreneurs, stepping-up to leverage the digital assets that Jio has built. In that sense, what Jio is building a powerful platform on which a range of rich digital services can be enabled-it does not matter if these services are created by Jio itself, its ecosystem partners or anyone globally.

30 | A U G U S T 2 0 1 5

QUARTERLY REPORT

SETTING UP FOR THE NEXT INNING

-Rohit Tillu

Investors always invest in various companies across

registered a growth of 56% of its Net profit from 762

sectors to derive maximum returns out of their

crore to 1193 crore on a year-to year basis in the first

investments. And to compute returns, they need some

quarter. The key reasons behind the profit growth

benchmarks to compare or indicators of some kind. The

were more sales, decreasing costs and favorable

returns will always be largely dependent upon how the

exchange rate fluctuations. This 56% growth was

company is performing in its business activity. Its

behind the street expectations by 5%. The sales

financial performance is one such indicator for

volume of the company grew at a higher rate than its

computing the returns. The companies release their

competitors. Maruti sold a total of 341,329 vehicles

financial results usually four times a year or on a

this quarter. The domestic sales grew by 13%

quarterly basis. These quarterly results can be used by

whereas the exports grew by a whopping 22%.

the investors to determine whether it would be wise to

A weaker Yen also improved the profitability as the

keep their investments with the company or shift them

company’s imports are usually paid in Yen to its

somewhere else to avoid losses.

parent company Suzuki Motor, Japan.

The financial results are also a key measure for investor

Telecommunications: Airtel

confidence. Whether the company is performing in the required way or not goes on to decide the share prices of the company. If a company is not performing according to the expectations of the, that would be reflected in its share price as a less lucrative company will not be sought after and hence its share prices are likely to go down. Such reports are also important for matching the expectations of various stakeholders with the actual performance. These stakeholders include various

market

experts,

financial

institutions,

Investment bankers etc. which are very important for the investors to evaluate the returns and potential of

Telecom major Airtel reported an increase in the net profit in the first quarter (Q1) of 24%, taking the profits from 1,225 crore to 1,554 crore as compared to last year. The company attributes the profit increase to the increase in customer base and the increase in mobile minutes and internet data, which have risen by 7.4% and 83.4% respectively. The average data revenue also moved up by Rs. 41 to Rs. 181 per user. The mobile data revenues accounted for 19% of the total revenues as compared to 12% last year.

their investment.

FMCG: Britannia Industries Ltd.

We bring you a few sectors of the economy here:

India’s leading biscuit maker Britannia Industries

Automobile: Maruti Suzuki

Ltd. Reported a 67% rise in their net profit for the

Maruti Suzuki, India’s largest car manufacturer registered 31 |aAgrowth U G U Sof T 256% 0 1 5of its Net profit from

first quarter (Q1) as compared to last year. The company had reported profits of Rs.113 crore in 2014 which grew to Rs. 190 crore in 2015. The sales revenue also increased by 13% from 1.771 crore in

first quarter (Q1) as compared to last year. The company had reported profits of Rs.113 crore in 2014 which grew to Rs. 190 crore in 2015. The sales revenue also increased by 13% from 1.771 crore in 2014 to Rs. 2002 crore in 2015. According to Britannia’s spokesperson, the cause for the increase in revenue is the operational efficiency and cost cutting techniques used by the company. The consumer off- take, which is defined as how many units of a particular product a consumer has brought, has also increased during the period.

Information Technology: Infosys Indian software giant Infosys declared their results for this quarter in line with the market estimates. The net profit stood at Rs. 3,030 crore on revenue of Rs. 14,354 crore. The profits and the revenue grew by 5.4% and 12.4% respectively when compared on year-to-year basis. The company also registered a volume growth of 5.4% quarter-on-quarter, which is highest in the past 19

compared on a year-to-year basis.

The market experienced swings throughout the whole quarter. The banking sector took the worst hit due to massive increase in the non-performing assets.

The currency exchange rate also experienced turbulence during the whole period which could not give the market a stable feeling. But as soon as the quarterly results were announced, the investor confidence boosted up as a result of finding the performance in line with the market estimates.

Especially with companies like Infosys, the share prices went up as soon as the results were declared.

Various market experts had predicted that the growth in various sectors would be very low as compared to previous years but it turned out to be higher than that of the previous

years. The Bombay Stock

Exchange’s Index (Sensex) jumped by hundreds of points as a result of more buying and selling because of positive results.

quarters. As a result, the share prices of the company

All the major sectors of the economy such as

jumped by 9% and 10% on the BSE and NSE

Telecommunications, manufacturing, fast moving

respectively.

consumer goods and Information technology posted

Banking: Bank of India (BOI)

positive net profits when compared on a quarter-onquarter basis. Due to poor performance of various

Bank of India’s net profit plunged 84% to Rs. 129.7

sectors in the last quarter of financial year 2015, it

crore on a year-to-year basis. The net interest income,

was not anticipated that such growth would prevail

which is the difference between the interest paid and

in the first quarter itself. If we take a bird’s eye view

interest earned, grew by 8.4% to Rs. 2,913 crore from

of the financial markets now, we would find them

Rs. 2,685 crore on a year-to-year basis. Provisions for

growing along with various sectors exhibiting

bad loans shot up by 69% to 1,514 crore. The gross

positive growth.

value of Non- performing assets also shot up to Rs 26,889 crore, rising by 114.5%. The net value of nonperforming assets also rose by 96.3% when compared on a year-to-year 32 | A U G Ubasis.

ST2015

PHARMACEUTICAL INDUSTRY SELL-OFF

WILL THE SUN RISE?

-Anupama Kumarswami

Being fifth largest speciality generic pharmaceutical

merger two companies agree upon combining their

company in the world, Sun Pharma has global revenues

operations into a single entity. While an acquisition

of over US$ 4.5 billion and is the one who provides high

happens when one company purchases another and

quality, affordable medicines highly trusted by patients

has the right to sell operations, merge them into

as well as the healthcare professionals in more than 150

similar groups in the purchasing company or close

countries. Sun Pharma’s worldwide presence is

facilities or even cancel products altogether. Sun

supported by 45 manufacturing facilities across 5

Pharma and Ranbaxy, both are well established and

continents. It is also India’s largest and extremely

prominent pharmaceutical industry worldwide and

trusted pharmaceutical company. The US market

also have high market presence in number of

contributes the most in Sun Pharma’s revenues while

countries. With this merger and acquisition, Sun

Russia, Romania, Africa, Brazil and Malaysia are the

Pharma and Ranbaxy have complemented each

key high growth upcoming markets. The 4th Quarter,

other’s areas of expertise of niche therapy, global

2015 had seen a net sales of Rs.6145 crores in India

pharmaceutical footprints and presence in generics

with sales globally of US$ 84 million and emerging

segment. Although Ranbaxy had met its sales targets

sales at US$ 123 million. The net profit registered by

for its latest financial year, it was incurring a net loss

the company was Rs.888 crores. India’s one of the

and suffering a decline in net worth since 2011. The

largest pharmaceutical company, incorporated in 1961

loss included dwindling value of its investments, loss

with a global presence in 46 countries like Brazil,

on foreign currency option derivatives and even the

China, Ireland, India, Japan, Malaysia, Nigeria,

settlement amount of US$ 515 million payable to the

Romania, South Africa, USA and Vietnam and world

US Department of Justice (DOJ) in 2013 by Ranbaxy

class facilities in 7 countries was Ranbaxy. The long

as they were accused of misrepresentation of data

term competitive advantage that it possessed was its

and irregularities found in two of its facilities in

own Research and Development centre.

India. As a consequence, the merger of both the companies happened at a time when Ranbaxy was

Hailed as one of the biggest mergers and acquisitions in

struggling to perk up its own financial position.

the Indian markets worth US$ 4 billion, Sun Pharma has acquired and delisted Ranbaxy by offering 0.8 shares of

The outcome expected out of the merger is in context

Sun Pharma for each Ranbaxy share to its shareholders.

with both the firms', Sun Pharma and Ranbaxy's

The exchange ratio represents an implied value of

financial situation. The deal will lead to dilution of

Rs.457 for each Ranbaxy share. The announcement of

16.4% of equity capital of Sun Pharma as its total

deal was due in December 2014 but it was pushed to

equity is of $3.2 billion and the merger size is of $4

July 2015 due to delays in regulatory approvals. In a

billion. It was believed that the merger will lead to

merger33two upon combining their | A Ucompanies G U S T 2 0 1agree 5

better filling up of therapeutic and geographic gaps

operations into a single entity. While an acquisition

in the US and a better access to budding markets,

better filling up of therapeutic and geographic gaps in the US and a better access to budding markets, strengthen presence and enhance investment morale in the domestic markets. The merger would take Sun Pharma to the helms of generic pharmaceutical markets.

Gross sales estimated out of both the companies’ combined were Rs.27000 crores or $4.2 billion.

Ranbaxy has wider reach not only in domestic markets but also in the US with 29% of its sales there. It also has 50% of sales in the emerging markets, which provides

related to this deal, Sun Pharma still had an

not only a strong but also effective platform

optimistic approach over it; but the unforeseen

complementing Sun Pharma’s strengths. Sun Pharma

happened.

has 60% of its sales in US, 23% sales in India and rest

On July 21st, the stocks of Sun Pharma fell as much

17% in rest of the world. Thus, with the merger Sun Pharma gets diversified market in US, India and rest of the world with expected sales of 47%, 22% and 31% respectively.

as 15.6%, the most since 26th June 2009 and touched a low of Rs. 799.05. With high expectations, it warned that its revenues and profit for the current fiscal year are likely to be adversely affected because

With the announcement of the merger, Sun Pharma was

of costs and charges related to integrating Ranbaxy

expecting a bullish market on stocks. It also expected

and resolving its manufacturing issues at its acquired

upside with revenue and profitability fronts. Sun

plants. They expected their revenue to either remain

Pharma even expected that they would maintain the rich

flat or show a decline. The costs that they were going

multiple of 24 times for both the merged companies

to incur will be due to the corrective steps that need

because of dilution of returns ratio and operating profit

to be taken to make Ranbaxy’s Indian plants

margins. They expected that their stock might even

complement with that of US manufacturing

touch Rs. 685. The management of Sun Pharma

standards. Market capitalization of the company

believes that they would achieve $250 million synergy

eroded by Rs.34050 crore and became Rs.193784.45

by the end of three years. They knew that Ranbaxy’s

crore. The market capitalization loss of Sun Pharma

single digit operating profit margin, forex derivatives,

was equivalent to the entire market capital of Power

high consultancy costs and high tax rate would still

Finance Corporation which is ranked 58th in terms of

remain an impediment. With high expectations arising

market capitalization on BSE.

from the pharmaceutical markets relating to the performance of both the firms, and negative subtexts related to this deal, Sun Pharma still had an optimistic approach over it; but the unforeseen happened.

34 | A U G U S T 2 0 1 5

This acquisition also faced many challenges. One of it was the impact of one time charges that occurred

keeping Ranbaxy’s losses at bay and resolves the issues at its Halol plant. Rising of SUN is possible, but it would embark on after a certain period of time.

mainly on the account of the merger as well as price erosion that occurred for some of the Sun Pharma’s products in the US. There was significant increase in other expenses for Sun Pharma and regulatory fees related to the integration. Sun Pharma is also looking forward to revive Ranbaxy by rebranding ‘Revital’ and increasing its sales. There is sharp decline in the sales of Sun Pharma due to problems related to its Halol plant which resulted in the erosion of price in some of its products. These challenges reflected in the fall of market

capitalization

for

Sun

Pharma

after

announcement of its merger with Ranbaxy.

With Ranbaxy’s being accused for incorrect practices and its sales being affected by the loss that it incurred, it was an obvious situation for Sun Pharma to expect a fall in the market capitalization. This fall not only included Ranbaxy’s past losses but also Sun Pharma’s onetime expenses relating to the deal. Revival of the loss would take more than 3 years while those fixed expenses which once incurred for merger and acquisition affected the market capital but also the value of Sun Pharma’s stocks. The situation can be reversed only if the Sun Pharma again starts performing while keeping Ranbaxy’s losses at bay and resolves the 35 | A U G U S T 2 0 1 5

ANOTHER E-BUBBLE IN MAKING?

TOP E-TAILERS TO RAISE $5 BILLION IN A YEAR

-Ranu Sarupria

E-Commerce, A type of business model or segment of

a high extent and has fascinated many consumers.

a larger business model that enables a firm or an

Today, online shopping has become a trend in India

individual to conduct business over an electronic

and the reason behind the adoption of this new

network, typically the internet. Electronic commerce

technique is the attractive online websites, user

operates in all four of the market segments: B2B

friendly interface, bulky stores with fashion

(Business to Business), B2C (Business to Consumer),

products, easy payment methods. No bound on

C2C (Customer to Customer)

quality and quantity and customer can choose choice products. The acceptance of e-commerce on a large

There is no denying the fact that e-commerce has entered India and is here to stay. Even the small and medium retailers of the country want to ride the wave and are ready to make a fortune out of the market place concept. It is known that online shopping has become popular these days. Indian retail industry is going through a traditional phase. Most of the retailing in our country is still in the unorganized sector. The spread out of the retails in US and India shows a wide gap between the two countries. Though retailing in India is

scale by the Indian people influence other business players also to try this new technique for their ecommerce business and gain more profits. Though online shopping is there since 2000 but it gained popularity with deep discount model of Flipkart. In a way it re-launched online shopping in India. Some market players like Amazon, Flipkart, and Jabong started hunting India for business. This retail market catered to each and every need of the customer. This market meets the needs in all the dimensions.

undergoing in expansion growth, the road ahead is full of challenges. While the retail industry itself has been

Social Media has become the hub for the new

present since ages in our country, it is only the recent

merchants which enables them to analyze the

past that it has witnessed so much dynamism. The

customer choice based on their purchase activities.

emergence of retailing in India has witnessed increase

Social networks like Twitter, LinkedIn, Google, and

in purchasing power of buyers, increase in product

Facebook have become a medium for easy log in and

variety with the aim of modern supply and distribution

purchase. The latest trend in the e-commerce is to

system. Online shopping in its early stage was quite

focus on mobile based shopping. Snapdeal now

simple, just a medium of shopping with a fewer options.

getting half of its traffic from mobile, up from 5%

The users can just place an order and pay cash on

ground a year back and Flipkart gets 40% up from

delivery.

15%.

But in the last few years the field has been renovated to a high extent and has fascinated many consumers.

Today,36 online | A Ushopping G U S T 2 0has 1 5become a trend in India and the reason behind the adoption of this new technique is

Online Grocery Stores are getting popularity in India due to dissolute convenience, ease of shopping and a fast

growing

market.

Punexpress.com,

Milestore.com, Atadaal.com have already entered

at an E-commerce company. Besides, Indian ecommerce companies are also gearing up for competition from China's Alibaba, which is likely to up the ante in India soon, in a tie-up with One97, which runs mobile wallet and E-commerce platform Paytm.

These start-ups, all in the red, are also keeping funds ready to fight Amazon. The Jeff Bezos-led ecommerce player is currently planning to invest about $5 billion in India and ensure India becomes fast growing market. Punexpress.com, Milestore.com, Atadaal.com have already entered into the market and gained popularity. All these reasons attracted a large number of players to enter and compete with the existing ones. Many of the companies went for the IPO in order to raise funds so as to be in the league. Flipkart was the company which invested around $3bn in 201213 which was followed by Amazon which initiated the

its second-largest market, after the US. Last year, a day after Flipkart said it had raised $1 billion, the Seattle-based group had announced an investment of $2 billion in India. That's not all. Conglomerates such as Reliance Industries, Tata’s and the Aditya Birla Group are strategizing for their respective ecommerce ventures, making it tougher for the current crop of start-ups.

investment of $3.5bn in the same year. This was the scenario which attracted competition even from the

According to calculations by investment banking

outside country.

firm Avendus Capital, internet-based companies raised a total of $5.5 billion in FY15. Of this, the top

In about a year, top e-commerce companies are expected to raise as much funds as the three sector

ones - Snapdeal, Flipkart, Paytm, Ola, Quikr and Zomato - accounted for about $3 billion.

leaders raised in about five years. Currently, three to four e-commerce majors are tying up anything between

As a result, E-commerce has been experiencing

$3.5 billion and $5 billion, to be spread through 12 to

stupendous growth in recent times which led to a

15 months. The present value of the Indian retail market

boom in E-tailing in India. But the real question is

is estimated by the Indian retail report to be around

whether the industry can sustain this high-growth

Rs12,00,000crore and annual growth rate is 5.7%

momentum or not? Growth Praxis has looked at

Only after that would a few e-commerce companies go

several such structural challenges which Indian E-

for an initial public offering (IPO), they added.

tailing industry is facing and has come out with a set

Companies such as Flipkart and Snapdeal will have to

of recommendations for existing players and

be well-funded to go for IPO, said a Senior Executive

investors.

at

an

e-commerce

company.

Besides, companies are also 37 |Indian A U G U Se-commerce T2015 gearing up for competition from China's Alibaba, which

pace or keep investing towards growing the market.

Given most of them are focused on the latter, the small and medium independent retailers are examining what changes are taking place in the immediate vicinity.

Snapdeal Raised about $850 million in 2014; nothing yet in 2015 GMV: $2 billion by end of 2014, target of $10 billion by 2015-end Paytm Got investment of $575 million from Ant Financial Services, affiliate of Alibaba, and undisclosed amount of

funding

from

Ratan

Tata

in

2015

GMV: $1.5 billion as of June 2015, targets $4-5 billion by year-end Amazon Announced investment of $2 billion in 2014; reports suggest

$5-billion

war

chest

being

readied

GMV: About $1 billion as of Sept 2014 Looking at the above information inference can be drawn that in order to expand the e-retail market and to compete with the existing market players, these retailers need to invest much more in specific market. .

A large chunk of their spending is towards, logistics, technology and demand or supply incentivisation. The retailers need to invest much more in capturing more specific market. The retailers also need to make substantial investment in understanding and acquiring some advanced expertise in developing more specific and accurate demand forecasting models. They can either reduce the burn rate and not grow at the same pace or38 | A U G U S T 2 0 1 5

OIL AND GAS DISCOVERIES

ONGC TO INVEST $8.8 BILLION IN KG OIL AND GAS FINDS

-Swarupa Roy

Even a slight fluctuation in oil and gas price is always

and China, India has recently become the third

termed to debates and opinions along with changes in

largest oil Importer in the world.

market and the share price. While the market is about

The growing Indian economy is facing a rising

whole lot of other commodities, oil and gas prices are

demand of oil and gas, creating a highly potential

one of key attention seekers, what generates such a

market for the oil exporters. On an average the

focus?

country’s oil import is around 80 percent of the total

Oil and gas industry is amongst one of the most

domestic consumption. According to an estimate of

elemental industries a nation has, and any changes in

IEA (International Agency Energy), India will cross

prices of oil and gas not only affect the market and

over 4.1 million barrels per day by the end of the

shares but also affects the consumption and production.

current year and the total energy consumption is

Starting from industries to common households, oil and

expected to rise thrice the times by 2035. While India

gas forms one of the primary needs. Catering to the ever

heavily depends on imports from the Middle East

increasing demand of crude oil and gas is not exactly a

countries, it also has its own 26 sedimentary basins

straight forward task given the fact that it is a non-

with an area of 3.14 million sq km. High investment

renewable natural resource and is extracted either from

are frequently made on technology and researches to

ground oil fields (onshore) or from depth of sea

expand India’s own oil reserves and reduce the

(offshore). This factor plays a vital role when it comes

import from gulf countries.

to the rapid consumption rate, giving the constant

India’s largest energy production company, Oil and

indicator of replenishment in the nearer future.

Natural

Currently, worldwide everyday around 93 million

announced that it will invest USD 8.8 billion in

barrels of crude oil and fuel is consumed, a figure which

starting the production from its Krishna-Godavari

is expected to grow subsequently.

(KG) oil and gas basin discoveries.

Owing to all these, stability between demand and

Krishna-Godavari basin in Andhra Pradesh is one of

supply of oil has been rarely seen. ‘Oil crisis’ is an

the petroliferous basins in India with a total area of

important issue that the global economy is always

40,000 sq. km both onshore and offshore. Significant

aware of. Maximum number of oil wells and reserves

oil discoveries have been made in this area with

i.e. around 70 percent of the world’s oil fields are in the

several drilled oil wells by both ONGC and Reliance

Middle East countries like Saudi Arabia, Kuwait, Iran

Industries Limited (RIL).

Gas

Corporation

(ONGC)

recently

and Iraq to name a few. Hence, oil is imported in very huge quantity from these countries. After United States and China, India has recently become the third largest 39 | A in U Gthe U Sworld.

T2015 oil Importer

The most recent discovery was made by ONGC in June 2009. The finds in KG- basin included oil in block KG-DWN-98/2 (KG-D5) and gas reserve in G-4 block in neighboring Bay of Bengal. After the

June 2009. The finds in KG- basin included oil in block

invest. A steady expansion in the ONGC’s own

KG-DWN-98/2 (KG-D5) and gas reserve in G-4 block

production in next few years can be observed. The

in neighboring Bay of Bengal. After the discovery in

high crude oil and gas prices can be dealt more

2009, it is now that ONGC has publicly announced its

properly if the inside production increases. What

plans of investing and developing the 11 oil finds and

exactly will be the price scenario is something that

the one gas find which will also include drilling 45

will be entirely dependent on the then international

wells. Gas from the offshore terminal will be

and domestic oil and gas market.

transported to onshore terminal thorough sub-sea pipe lines. The entire area of discovery is estimated to be 7,294.6 sq. km deep sea and hence, has been divided into two category of Northern Discovery Area (NDA) with 3,800.6 sq. km and Southern Discovery Area (SDA) with 3, 494 sq. km.

With the demand in India growing, it is important that the country relies less on its imports and hence ensure getting less exposed to disruption in import supplies and hiked prices. ONGC’s investment in oil discoveries and production might play a vital role in reducing such impact of imports. Once development

Further, ONGC has categorized the entire block into

of oil and gas reserves of KG basin is completed and

three clusters on the basis of production. Cluster-1 will

supply is started, it is then the actual effect on the

have a production of 14.5 million standard cubic meters

Indian economy can be noticed along with the

of gas per day for 15 years. Cluster-2 compromises of

potential of ONGC to cater to the rising domestic

Cluster 2A (oil) which is approximated to have a

demand.

production of 75,000 barrels per day, and Cluster 2B (gas finds) is estimated to produce a total of 32.5 billion cubic meters of gas in 14 years. While these two clusters will be developed for production, there is no current technology to access the Cluster-3 gas finds which are in very deep sea.

Given the recent news, the current high level of oil and gas import by India might witness a reduction in future owing to the production from KG-basin by ONGC. Plus, there will be also an increase in the country’s domestic output from oil and gas assets. There are strong chances of rising share value of Oil and Natural Gas Corporation in coming times as compared to its competitors in the market, giving a potential reason to invest.

A steady expansion in the ONGC’s own

production 40 | AinUnext G U Sfew T 2years 0 1 5 can be observed. The high crude oil and gas prices can be dealt more properly if

BANKING SECTOR

SBI COMMITS Rs. 635 CRORE FOR A NEW PRIVATE EQUITY FUND In the hindsight, CY2014 was a smooth ride for equity

Asset Allocation

investors. However, in CY2015 so far the ride has been

Unlisted

rather bumpy and equity investors are wondering if they

NCDEX

-Jharna Soni

should bite the bullet of equity investing. Despite various concerns such as anemic earnings growth, poor monsoon and global slowdown, most investors are finding it difficult to stay out of equities.

SSIPL (heading for IPO) GSP Crop Sciences Listed

A better investment landscape seems to have ushered in



ING Vysya

a season of fund raising by private equity (PE) and venture capital (VC) firms. Bulge bracket global

Solar Industries

Investors, State Bank of India and State General

Fund 1: $100 million already fully invested

Reserve of Oman are now partnering to make big-ticket

Fund 2: $300 million sanctioned, raising now

investments on the bustling private equity space. SBI

Potential limit for future funds $1.5 billion

has committed $100 million (Rs 635 crore) for a new

sanctioned, raising now.

$300-million (Rs 1,900 crore) PE fund being raised by Oman India Joint Investment Fund (OIJIF). It has been one of the largest commitments of SBI in private equity till date. The Oman India Joint Investment Fund, the coinvestment vehicle was set up in 2010, started off with a corpus worth $100 million. The partners have now decided to launch Fund 2, with an investment of $300 million.The bank said, "We continue to explore

Headed by Srinath Srinivasan, who earlier led Reliance PE, the fund has invested close to 70% of its corpus in companies which include National Commodity & Derivatives Exchange Limited, ING Vysya Bank Limited, Indus Teqsite Private Limited, Beaver Engineering & Holdings Limited and Solar Explosives Limited.

opportunities in the area of private equity and venture

Apart from OJIF, State Bank of India has invested in

capital fund (VCF) investments. During FY15, five new

a pool of private equity funds, one being in GSP

VCF investments amounting to Rs 495 crore were

Crop Science, a Gujarat-based agrochemicals

committed to."

company.

Investment Objective

Established in 1972, GSP Crop Science is a leading

The fund aims to provide opportunities for long-term growth of capital through active management in a diversified basket of equity stocks of companies.

manufacturer, distributor of bulk and branded agro chemicals. Its portfolio comprises of more than 70 branded products, suite of technical products resulting in over 300 SKUs (stock keeping units) of

41 | A U G U S T 2 0 1 5 Asset Allocation

its products. The products are marketed through an extensive pan-India network of 5,000 distributors,

resulting in over 300 SKUs (stock keeping units) of its products. The products are marketed through an extensive pan-India network of 5,000 distributors, over 30,000 dealers and 34 depots. GSP exports its products to 25 countries.

ended June, totalling $9.5 billion.

This is 65% of the volume recorded in the whole of last year when there were 795 deals worth $15.2 billion. "The inflow of PE money into India is primarily because investors believe that India will

"With OIJIF's investment and our internal resources,

get back on the growth cycle again and it represents

GSP aims at doubling its market share in coming three

an attractive destination compared to other large

years," said Kenal Shah, managing director, GSP Crop

emerging markets," said Sri Rajan, Bain India MD

Science.

and senior leader of Bain & Company's private

"We believe there is a huge potential for growth in

equity consulting practice. "Among major emerging

agrochemical sector in India driven by growing

markets, it (India) is one of the most attractive

awareness among farmers and favourable political

investment destinations, if not the most attractive

impetus to increase farm productivity," he stated.

one," he said. Post the global meltdown of 2008,

"We invested in GSP Crop Science based on its

India PE investments had taken a hit. The coming to

underlying strengths in research and development

power of the Narendra Modi government, which is

leading to innovative products, marquee multinational

considered pro-business, seems to have revived

and domestic customers, prudent mix of branded

India's appeal as an investment destination. Global

products and bulk sales in India and abroad," said S

investors such as Warburg Pincus KKR, Blackstone,

Srinath, CEO, OIJIF.

Temasek and State bank of India are among PEs that

Performance of private equity

have stepped up their India investments in the last two years. The sectors that have attracted most PE

The booming ecommerce and startup spaces and signs

deals

of an improving economy have helped India record

healthcare and technology. There have been several

more than $9.5 billion, or over Rs 60,000 crore, in

deals where investors who entered the Indian market

private equity investment deals in the first six months

in 2007-08 at sky-high valuations managed to exit

of 2015.

from many of their investments.

If the current pace continues, total PE deals this year

"PE investments have zoomed in H1 2015 due to a

will surpass the record $17.1 billion, or about Rs

higher number of secondary transactions, which also

108,000 crore at current exchange rate, set in 2007.

provided exit to the vintage transactions of 2006-08,"

According to data from global consulting firm Bain &

said Sanjeev Krishan, executive director and head of

Company, there have been 650 private equity and

private equity at PricewaterhouseCoopers India.

venture capital deals in the country in the six months

Around 60% of the deals have been secondary,

ended June, totaling $9.5 billion.

where one PE fund buys out from others.

| A of U Gthe U Svolume T 2 0 1 5recorded in the whole of last This is42 65%

A senior managing director and India head of a PE

year when there were 795 deals worth $15.2 billion.

fund expects this trend to continue. "Lack of a

include

ecommerce,

financial

services,

COMPANY

FUND

VALUE ($M)

One97 communications

Alibaba Holdings Ltd

635

Ola cabs

Steadview Capital Master Fund

402

Shriram City Union

Apax Partners LPP

386

State Bank of India

OIJIF

300

Sun Pharma

Tamasek holding advisors

298

PNB Housing

Cartyle Asia

257

Ostro energy

Actics Advisors private Ltd

230

Omkar Realtors

Plramal

191

Faery Estates

CPPIB

180

TABLE: TOP 10 DEALS IN 2015 A senior managing director and India head of a PE fund

will give higher long-term returns," says Anupam

expects this trend to continue. "Lack of a buoyant IPO

Kapur, director of Finqa. Consult a CFP to learn

market has left the PE funds with few options for exits

about your risk appetite. Unless you have already

and secondaries will continue to be a preferred option

lived through a market crash, it may be lower than

for some time now," said the person who requested not

you think.

to be named.

Who should invest?

Only investors with a 7-10 year horizon should invest in these funds. "Stay invested across market cycles to reap the benefit of their disciplined approach," says a spokesperson.

Conservative investors with a low risk appetite should opt for these funds. "Those with greater tolerance for volatility and a long horizon should stick to diversified funds. While the ride will be more volatile, those funds will give higher long-term returns," says Anupam 43 | A U G U S T 2 0 1 5

Kapur, director of Finqa. Consult a CFP to learn about

VRIDDHI’s RESEARCH CORNER

COMPANY IN FOCUS: ABAN OFFSHORE LIMITED

Industry - Crude Oil & Natural Gas (Upstream) Management - Reji Abraham and Group Current Market Price -Rs. 305.00 Market Capitalization - Rs. 1780 crores P/E -9.34 Industry P/E - 13.49 EPS (TTM) - Rs. 32.36 Book Value - Rs. 351.81 Price/Book - 0.87 Dividend (%) - 180% Dividend Yield (%) - 1.18 Face Value – Rs. 2

–Suraj Madhavan

VISION Vision is to achieve far-reaching success in every field

by

developing

innovation,

integrated,

enterprising and world-class services for the global market.

ABAN OFFSHORE CLIENT LIST -ONGC -Hardy Exploration & Production (India) Inc. -Oriental Oil Co., Dubai.

-Shell Brunei.

COMPANY OVERVEIW

-Shell Malaysia.

-GSPC.

ABAN Group was established as small engineering company by late Mr .M. A. Abraham in 1986.

The group took a giant step when it executed the high pressure system and cross country pipelines for refineries and fertilizer and petrochemical industries.

Aban Offshore was established in the same year when it provided offshore drilling services to ONGC. Aban Offshore is the flagship company of the Aban group. By 1990 most of the player chose to exit the drilling sector

-Hindustan Oil Exploration Co. Ltd. -Cairn Energy.

-ROC Oil. -Shell (South East Asia) SERVICES PROVIDED BY THE COMPANY -Exploratory services.

-Drilling services.

-Production of hydrocarbon.

-Manning and management.

but Aban remained focused to the drilling business. It kept on moving and increasing its presence. Currently

ANALYST RECOMMENDATION

Aban Offshore owns twenty offshore drilling and

We initiate coverage with SELL recommendation

production unit. In line with global expansion strategy,

on Aban Offshore

Aban Offshore established its subsidiary named Aban Singapore Pte Ltd. Its Singapore subsidiary acquired 33.7% stake in Sinvest ASA, a Norwegian company with eight new premium jack-ups on order.

The recent correction in crude oil price has significantly impacted the earnings of upstream companies resulting in falling global rigs utilization and softening of rig rentals. In such a fragile macro environment, on one hand upstream companies are

44 | A U G U S T 2 0 1 5

expected to cut down on capex resulting in lower rig demand and on the other hand, global rig market will

environment, on one hand upstream companies are expected to cut down on capex resulting in lower rig demand and on the other hand, global rig market will witness additional supply of ~173 newly built rigs in

business with the FPU Tahara’ owned by Hitech.

Between 2002 and 2006 Company added two more jack-up rigs (Aban V and Aban VI) and a drill ship (Frontier Ice).

2015E & 2016E. This poses major threat to Aban's earnings growth as of its nine rigs (i.e. 60% of operating rigs portfolio) are due for renewal in 2015 and three are

In 2006 the Company set-up Aban Singapore Pte Ltd in Singapore as its wholly owned subsidiary for

lying idle. Additionally, significant leverage on Aban's

expanding the operations globally.

balance sheet and ageing of fleet are other key factors

During 2006, the Company issued Zero coupon

which makes us cautious on its fundamentals. This also

Foreign Currency Convertible Bonds for a total

lowers the chances of listing of its Singapore subsidiary

value of USD 100 mn convertible into equity shares.

to pare down its debt in the medium term.

It had also issued non-convertible redeemable

P/E – 19.78

cumulative preference shares during 2006. These are

Industry P/E – 14.80

currently listed in BSE.

EPS (TTM) – Rs. 6.01

ASPL had acquired a drillship and a jack-up rig

Book Value – Rs. 42.70

besides placing order for construction a new Jack-up

Price/Book – 2.78

through its 100% SPVs.

Dividend (%) – 20.00 Dividend Yield (%) – 1.68

In 2007 ASPL had acquired 100% shares of Sinvest

Face Value – Rs. 10.00Aban Offshore

AS, a listed Norwegian company. At the time of

Aban Offshore Ltd was incorporated in 1986 and went public in 1988. The shares are currently listed in Bombay

Stock

Exchange

and

National

Stock

Exchange.

The company acquired its first two jack-up rigs in 1987.

In 2000 the company purchased a 300-ft. jack-up rig from Mahindra & Mahindra Ltd.

acquisition by ASPL, Sinvest had 8 Premium Jackup rigs of which two were delivered and 6 were under various stages of construction at the Singapore yards.

In 2009, Company issued equity shares to investors under Qualified Institution Placement scheme for a total amount of Rs.698 crores.

In July 2014, Company issued equity shares to

In 2002 Company merged Hitech Drilling Services

investors under Qualified Institution Placement

(India) Ltd., belonging to the Tata Group with itself,

scheme for a total amount of Rs.750 crores.

taking the total fleet to four rigs.

This also enabled the Company to enter the FPSO business with the FPU Tahara’ owned by Hitech.

45 | A U G U S T 2 0 1 5

Between 2002 and 2006 Company added two more

“ADD IT UP” The record number of trades Equity F&O were done on 23-12-2014 and it was 52,86,778. In Equities segment, record number of trades were done on 16-05-2014 and it was 1,18,05, 386.

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46 | A U G U S T 2 0 1 5